Consider the two payment plans as shown here for an $18,000 auto loan
Plan 1: monthly payments of $306.91 over period of five years which corresponds to a compound interest rate of 0.9% compounded monthly
Plan 2: monthly payment of $229.02 over a period of five years which corresponds to a compound interest rate of 1.9% compounded monthly
Determine which plan has the lower cost of credit find the lower cost of credit
To find the lower cost of credit, we need to calculate the total amount paid for each payment plan.
For Plan 1:
Monthly payment = $306.91
Number of months = 5 years * 12 months/year = 60 months
Total amount paid = Monthly payment * Number of months = $306.91 * 60 = $18,414.60
For Plan 2:
Monthly payment = $229.02
Number of months = 5 years * 12 months/year = 60 months
Total amount paid = Monthly payment * Number of months = $229.02 * 60 = $13,741.20
The lower cost of credit is the total amount paid that is lower. Therefore, Plan 2 has the lower cost of credit, which is $13,741.20.